CHAPTER 6: ORGANIZATIONAL INNOVATIONS:  TQM Implementation Guidelines

TOTAL QUALITY MANAGEMENT; JUST-IN-TIME

PRODUCTION SYSTEM
The Institute of Management Accountants (IMA)
has devised an 11 phase process spanning three
years to establish TQM.
What is Quality?
Year One - Preparation and Planning
The "ultimate test of quality product or service is
whether the product or service meets or exceeds *Create quality council and staff
customers' expectations."
*Conduct executive-quality training programs
"Total quality (management) is the unyielding and
continually improving effort by everyone in an *Conduct quality audits
organization to understand, meet and exceed the *Prepare gap analysis
expectation of customers." - Procter and Gamble
*Develop strategy on quality improvement
Year Two - Training and Implementation
 Core Principles of TQM
*Conduct employee communication and training
1. Focus on Satisfying the Customer program
- TQM begins by identifying the firms' customers, *Establish quality teams
external and internal; determining their needs,
requirements, and expectations; and then doing *Create a measurement system and set goals
whatever it takes to satisfy them. External
Year Three - Assessment, Review & Revise
customers are the ultimate recipients of the firm's
products or services. Internal customers are *Revise compensation and appraisal
individuals or subunits within the firm involved in
manufacturing the product or providing the *Launch external initiative with suppliers
services. *Review and revise
2. Strive for Continuous Improvement (Kaizen)
- "We know we will never arrive; there is no finish" -  Quality involves conformance with
Coca-Cola Company specifications for product or services that
- "With competitors forever trying to outperform us meet or exceed customer requirements and
and customers exhibiting ever-changing expectations.
expectations, a firm can never reach the ideal  Certification or confirmation that a goods or
quality standard" services meets the requirement of
legislation, prescribed rules and regulations
- "Continuous quality improvement and cost and specified standards.
reduction (Kaizen) are necessary to remain
competitive in today's global marketplace"  Types of Conformance
3. Full involvement of the Entire Workplace
1. Goalpost Conformance (zero-defects
- Employee involvement can range from simple
conformance)
information sharing, dialogue, or group problem
solving, all the way to total self-direction. - To a quality specification expressed as a specified
range around the target.
4. Active Support and Involvement of Top
Management - The target is the ideal or desired outcome of the
operations.
- Successful implementation of TQM requires
unwavering and active leadership from the CEO 2. Absolute quality conformance (robust quality
and senior managers approach)
5. Use Clear and Measurable Objectives - Requires that all product or services to meet the
target value exactly with no variation.
- Progress can easily be seen if objectives are
clear. Measurable objectives forge efforts toward - Robustness in quality comes with meeting the
the common goal. exact target consistently.
6. Timely Recognition of Quality Achievement - Considered a better approach than zero-defects
conformance.
- Quality achievement of people and subunits when
recognized timely is the best way to emphasize tie  Cost of Quality
firm's continuous struggle for better quality and to
ensure efforts toward quality at every level. Three factors underlie the quality of a
product or service. These factors are grade, quality
7. Continuing Education and Training of design, and quality performance.
- Employee training programs serves as a The bulk of all quality cost are associated
communication link to convey management with quality performance and those cost can be
commitment to total quality and provide employees broken down into four broad groups.
with necessary skills to achieve total quality.

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 1. Prevention Cost 3.) Helps managers identify relative importance
of the quality problem forced by the firm
These are costs incurred to avoid poor-quality 4.) Helps managers see whether their quality
goods or services or reduce number of defects in costs are poorly distributed and when
product or services. These includes: needed, it helps them distribute the costs
 System development better
 Quality engineering
 Limitations of Quality Cost Information
 Quality circles
 Statistical process control activities
1.) Some important quality costs are typically
 Supervision of prevention activities
committed from the quality cost report.
 Quality improvement project 2.) Simply measuring and reporting quality
costs does not solve quality programs. Only
2. Appraisal Cost management can solve them.
These costs, also called inspection costs, are 3.) A log may exist between when quality
incurred to identify products before the product are improvement programs are put into effort
shipped to customers. These includes: and when the result are seen.

 Test and inspection of coming materials  Nonfinancial Measures of Quality and

 Test and inspection of in-process goods Customer Satisfaction
 Finished product testing and inspection
Nonfinancial measures of quality are leading
 Supplies used in testing and inspection
indicators of future long-run performance, unlike
 Depreciation of test equipment
financial measures of quality that focus on the short
 Maintenance of test equipment run.
3. Internal Failure Costs Nonfinancial Measures of Customer Satisfaction
These are costs that result from identification of 1. On-time delivery rate
defects during the appraisal process. Examples 2. Delivery delays
are: 3. Percentage of products that fail soon or
often
 Net cost of scrap 4. Number of customer complaints
 Net cost of spoilage 5. Number of defective units shipped to
 Reword labor and overhead customers as a percentage of total units
 Reinspection of reworked products shipped
 Retesting of reworked products 6. Market research information on customer
 Disposal of defective product preferences and customer satisfaction with
specific product features
4. External Failure Costs
Nonfinancial Measures of Internal Performance
These are incurred when poor-quality goods or
services are detected after delivery to customers. 1. Number of defects for each product line
they includes: 2. Employee turnover
 Warranty repair and replacements 3. Process yield
 Repair and replacement beyond warranty
period  Just in time production
 Product recalls
 Liability arising from defective product Just in time (JIT) is the philosophy that activities are
 Prevention and appraisal costs are costs of undertaken only as need or demanded .
conformance because they are incurred to
ensure that products and services meet It is a production system also known as pull it
customers’ expectation. through approach in which materials are purchased
 Internal failure and external failure costs are and units are produced only as needed to meet
costs of nonconformance because they are actual customer demand.
the costs incurred and opportunity costs
JIT production system aims to simultaneously:
because of rejection of products or services.
 Cost quality is the sum of conformance and 1. Meet customer demand in a timely way
nonconformance costs.
 Quality cost report is a report that details 2. High quality products
prevention costs, appraisal costs and the 3. At the lowest possible total cost
cost of internal and external failures.
Key features of JIT production system:
1. Maintaining a limited number of suppliers
 Uses of Quality Cost Information
- Relying on a few ultra reliable suppliers who are
The quality cost information is used by manages in
willing to make frequent deliveries.
several ways:
- If a single part is unavailable, the entire assembly
1.) Provide basis for establishing budgets for
operation may have to be shut down.
quality costs to reduce total cost involved
2.) Helps managers fee the financial
significance of quality

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2. Improving plant layout 5. Maintaining flexible workforce
-All machines needed to make a particular product - Companies employing JIT must have workers
are often brought together in one location. who are flexible and multiskilled .
3. Improving production scheduling
- There should be a good coordination of efforts  Financial Benefits of JIT
throughout the value chain-from the time the order
are received, from the customers, to the time the 1. Greater transparency of the
goods are manufactured up to delivery. production process
2. Heightened emphasis on eliminating
4. Targeting zero defects the specific causes of rework, scrap,
-Through “continuous monitoring” the company and waste
makes directly responsible for spotting defective 3. Lower manufacturing lead times.
units. Supervisors and other workers also
determine the cause of the defect and correcting it
before any further units are produced .

Illustrative : Problem - Implementing a JIT Production System

Nelson corporation, a manufacturer of copper fittings is considering implementing a JIT production system. The following
data are gathered to implement JIT production.
a) P100,000 annual costing cost to reduce setup times must be incurred.
b) Average inventory will be reduced by 500,000
c) Relevant cost of insurance, storage, materials handling, and set up will decline by P30,000 per year
d) Required rate of return on inventory investment is 10% per year
e) Quality will be improved and rework will reduced on 500 units per year resulting in savings of P50 per unit.
f) Better quality and faster delivery will enable the company to charge P2 more per unit on the 20,000 units each
year.
Required: Should Nelson implement the JIT production system?
Answer:
Total annual relevant benefits and cost savings
Carrying costs[(10% x P500,000)+30,000] P80,000
Rework savings (500 x P50) 25,000
105,000
Incremental contribution margin (20.000 x P2). 40,000
Total benefits 145,000
Less: Additional annual tooling cost 100,000
Net benefit P45,000
Note: Since the total annual benefits and cost savings exceeds the annual JIT Implementation cost by P45,000, Nelson
should implement a JIT production system.
 Performance Measures and control in JIT production
1.) Financial performance measures such as inventory turnover ratio which is expected to increase

2.) Non-Financial performance measures of time, inventory and quality, such as:

 Manufacturing lead time expected to decrease

 Units producer per hour expected to increase
 Number of days of inventory on hand expected to decrease
 Total set up time for machines
Total Manufacturing Time expected to decrease
 Number of units requiring rework or scrap
Total number of units started and completed expected to decrease

Prepared by : GROUP 1

Leader: Mary Jane Leongson

Members :

Rizza Ayson Jerwin Pimentel

Charlene Delfinado Georgia Reyta

Mikaela Lyka Junio Vince Villaraza

Aaron Justin Loreto Janelle Villasana

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